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@ pam
2025-04-13 02:41:14In wanting to understand the global economy of manufacturing better and in particular the decline of US manufacturing, I picked up a few books on it. This one is called ‘Why manufacturing is still key to America's future’ by Ro Khanna. It’s a little old but I’ve shared some recent stats as a comparison as well. Ro Khanna was with the U.S. Dept of Commerce, focusing on govt's impact, or lack thereof, on manufacturing. Some key highlights:
- You can’t split R&D and manufacturing. When you offshore manufacturing, you send off design with it and you lose a big chance to cultivate innovation in the US - Andy Grove, CEO of Intel.
- Manufacturing is needed to reduce the trade deficit that started in 1971
- U.S. exports to China are $153.8 billion, imports are $536.8 billion. Hence trade deficit with China is $382.9 billion
- The private sector demands out-of-the-box thinking. In the gov’t, follow instructions; don’t make waves; keep your head down for career advancement.
- Small and medium-sized businesses create about half of all manufacturing jobs and make up more than 90 percent of U.S. manufacturers
- Cluster theory - a lot of business in the surrounding area impacts other businesses i.e. supply chain. On the flip side, businesses shutting down will be like dominoes impacting other businesses. Michael Porter, The Competitive Advantage of Nations" (1990)
- Foreign subsidy - foreign companies ie China get a lot of subsidies to build manufacturing - free land, and factory capital. Cheap labour is not the only competition
- Corporate tax - The US charges heavy corporate tax on foreign earnings hence companies rather invest outside than bring it back - John Chambers, CEO and Chairman Emeritus, Cisco 9 < 1 percent of American businesses export and mostly to Canada and Mexico only
- US global manufacturing share in the ’90s was >22%. It started slipping in 99’. Today it’s 16.8%. China’s global market share was 3% in the 90, 8% in 2000 - today it is 28.7%
**More inputs **
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Andy Grove, Intel's 3rd employee hired in 1968 and CEO from 1987 to 1998, drove Intel's market cap from $4 billion to nearly $197 billion, making it the world's largest computer chip manufacturer. He highlighted the inseparability of design and manufacturing - which leads to the loss of R&D and innovation in a country when manufacturing is offshored. Grove also questioned the absence of tracking offshored jobs.
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Apple has a similar philosophy in bridging design and manufacturing. Dow Chemical built research facilities outside of the US because it could not separate manufacturing from R&D
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Manufacturing’s deterrent factor is high capex and lower returns compared to the service sector.
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“The Commerce Department was a chronic underperformer, led in recent times by political hacks or bureaucrats, from one party or the other, who simply didn’t get it.” (from the book)
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Manufacturing is needed to reduce the trade deficit. In 2009, the trade deficit reached almost $375 billion - meaning the US spends $375 billion more on foreign economies than it does fueling its economy. (Current trade deficit is $65.5 billion)
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To balance the economy, export more and import less. In 2009, 60% of manufacturing goods were exported (current amount of 80%). But this is not enough to fulfil domestic consumption and reduce imports, hence the need for more manufacturing.
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Trade deficit with China - In 2009, the total trade deficit with China was more than $220 billion, service trade surplus of $6 billion. Today, U.S. export to China is $153.8 billion, imports from China is $536.8 billion, and the trade deficit with China is $382.9 billion (almost double the amount of trade deficit with China in 14 years)
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While knowledge workers are important, must not discount the importance of hands-on technical skills
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The rate of decline in manufacturing increases unemployment in manufacturing jobs such as engineer, designer, or floor operator. The majority of the workforce is Caucasian, with African Americans constituting about 10 percent and Hispanics about 15 percent
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“If the private sector rewards “out of the box” thinking, Washington often expects regurgitation as the norm for career advancement. Follow instructions; don’t make waves; keep your head down—that’s the motto among insiders. It’s something that I didn’t like and never got used to.” (from the book)
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Our nation cannot bleed manufacturing jobs and expect to have a middle class: Bob Baugh, union leader
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Small and medium-sized businesses create about half of all manufacturing jobs and make up more than 90 percent of U.S. manufacturers.
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Importance of local manufacturers in helping the country during turmoil - The Globe factory produced protective clothing for firefighters during 9/11. The challenges were seen during COVID-19, not being able to manufacture masks, medical
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Federal gov’t program: the Manufacturing Extension Partnership (MEP) helps small and medium-sized manufacturers improve their competitiveness
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The decline of manufacturing impacts surrounding businesses (I’ve seen it drop like dominoes). This is based on the cluster theory by Professor Michael Porter, introduced in the late 1990s, which emphasizes geographic concentrations of related businesses and institutions in specific industries. Clusters offer advantages like knowledge sharing, talent access, efficient supply chains, and competition-driven innovation, benefiting regional development and global competitiveness.
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Gov’t subsidies: Foreign competitors get hefty government subsidies, including free land, factories, and capital. These subsidies make price competition tough, not just cheap labourers (for example China)
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Corporate tax: Overseas earnings are taxed when brought back to the U.S. Due to high corporate tax rates, companies rather invest these earnings abroad. A one-time tax incentive for repatriation will encourage more domestic investment and job creation (John Chambers of Cisco, and Tim Guertin of Varian)
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General observation - The US pioneers innovation but is unable to keep up the fight when competitors come on board because of the lack of support compared to other countries - i.e. luxury cards, automobiles, automation, silicon industry, solar industry etc
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95% of the world’s consumers and 70% of the world’s purchasing power are outside the United States (in 2009 and about the same now)
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Only 1 percent of American businesses export.
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Out of that, 58% of the companies that do export only export to Canada or Mexico. They’re still reluctant to venture out to Latin America, Asia, or even Europe.
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Exports make up only 11% of the U.S. gross domestic product (GDP) - Note, still the same from 2009 to the present. Germany, China, India, Brazil, Russia, UK, Japan - exports more
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Trade shows are useful and costly. A suggestion is for the U.S. government to help cover travel and participation expenses for first-time attendees. These businesses could repay the government if they secure sales at the show, similar to how the Department of Agriculture supports food companies.
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Several countries are subsidised in tradeshows and have pavilions that are chic and modern such as the British, Germany, Turkey, Italy, and Egypt. US’s booths don’t stand out.
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The simplicity of getting paperwork sorted: In 1972, when Andy Grove went to Malaysia to establish Intel’s first foreign operation, the chief minister of Malaysia introduced him to Chet Singh, who headed the state’s Penang Development Corporation. “Chet Singh is your one-stop agent,” the Malaysian chief minister told Mr. Grove. Whenever Intel had an issue with getting a particular license, permit, road paved, or available tax credit, Chet would take care of it. He stayed in his job for more than two decades until the early 1990s, facilitating Intel’s ability to expand its Malaysian presence. Today, Malaysia is home to Intel’s largest manufacturing facility outside the United States (Note: Malaysia doesn’t treat its people the same way)
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Over time I think manufacturing moved away because of some mixture of regulations (not all bad), high-cost labor (unions), higher cost of capital (complex) and a focus on other things (comparative advantage, or misdirected cultural signals?). Bill Gates, 2011
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US global manufacturing share in the 80’s and 90’s was 22% - 24%. It started slipping in 99’. Today it’s 16.8%. China’s global market share was 3% in the 90, 8% in 2000 - today it is 28.7%
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Global Manufacturing Output China – 28.7% United States – 16.8% Japan – 7.5% Germany – 5.3% India – 3.1% South Korea – 3% Italy – 2.1% France – 1.9% United Kingdom – 1.8% Indonesia – 1.6%